Scope Ratings has taken the following rating actions on the notes issued by IM SABADELL PYME 10, FT:

Serie A (ISIN: ES0305154009), EUR 970.6m: upgrade to AA+_SF, from AA_SF
Serie B (ISIN: ES0305154017), EUR 301.9m: upgrade to B+_SF, from B_SF

Rating rationale

The upgrade reflects the increased credit enhancement for the Serie A notes, driven by amortisation, to 30.3% from 22.0% at closing; the Serie B notes, to 6.5% from 4.75% at closing. The solid collateral performance also supports the rating action.

Assets classified as over 90 days past due currently comprise just 0.65% of the portfolio. The structure deleverages quickly via prepayments, at 11.8% per annum (all data as of 31 May 2017). The benign macroeconomic environment in Spain, which Scope expects to continue in the short to medium term, also reflects positively on the expected performance of the notes.

Banco de Sabadell (the originator) is the sole counterparty for the transaction. Scope believes that the credit quality of the bank, considered resolvable and systemically important in Spain, supports the current ratings for the notes. Scope assessed the credit quality of Banco de Sabadell using public information provided by the bank. In addition, the bank’s ongoing operational involvement is positive for the transaction because of its strong record as an experienced SME lender in Spain.

Sabadell’s structural replacement as account bank upon the loss of an investment grade assessment provides additional comfort. Scope does not consider the replacement trigger to be commensurate with the highest achievable ratings, however. 

Key rating drivers

Improving Spanish economy (positive). The Spanish economy is continuing to improve. This recovery will benefit the Serie A notes in the short term. The impact on Serie B notes is, however, less certain due to their longer weighted average life and the persistence of long-term macroeconomic risks, which stem from fundamental imbalances.

Limited delinquency levels (positive). Total delinquencies are 6.77% of the outstanding balance as of 31 May 2017, 80.9% of these relate to 30-day delinquencies that are mostly technical and high likely to be cured; above-90-day delinquencies are rising but remain low at 0.65% of the current portfolio. No defaults have been reported, mainly because delinquencies have not yet passed the ‘360 days past due’ threshold.

High expected recovery rate (positive). Low loan-to-value ratios on mortgages (weighted average of 47%) underpin the relatively high expected portfolio recovery rate of 42.1% for the AA stress scenario.

High default volatility risk (negative). Delinquency vintage data presented to Scope at closing showed significant levels of volatility, which signals an increased probability of high default rates under stress scenarios. 

Key rating-change drivers

Faster employment recovery (positive) in Spain would support lower default rate assumptions. Scope does not expect employment rates to pick up quickly during the remaining life of the transaction.

Crystallisation of weak-obligor risk (negative) would impact the Serie B notes. This risk lies mainly beyond the risk horizon of Scope’s positive outlook for the Spanish economy. Recovery stagnation or even a new recession could place a significant amount of renewed pressure on SMEs. 

Quantitative assumptions

Scope has modelled the transaction over two segments, whose proportions have been updated, according to investor reporting as of 31 May 2017. Unsecured loans account for 58.1% of the portfolio, with secured loans making up 41.9%. Scope has applied the same key modelling assumptions as at the date of closing. The key assumptions are:

• Unsecured loans: mean lifetime ‘90 days past due’ default rate of 5.0%, a coefficient of variation of 84.7% and a base case recovery rate of 27%. A long-term default rate of 5.4% and a coefficient of variation of 80.0% is also modelled to account for fluctuations over a full economic cycle.
• Mortgage-secured loans: mean lifetime ‘90 days past due’ default rate of 10.0%, a coefficient of variation of 95.3% and a base case recovery rate of 77.9%. Scope also uses a long-term default rate of 9.8% and a coefficient of variation of 56.0% to account for fluctuations over a full economic cycle.

Scope has drawn upon monthly collateral reports up to 31 May 2017 and the first three quarterly note-payment reports up to 22 May 2017.

Rating sensitivity 

Scope tested the resilience of the rating against deviations in the main input parameters: the portfolio mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios. The following shows how the quantitative results for each rated tranche deviate from the assigned ratings when the portfolio’s expected default rate is increased by 50% or the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Serie A: sensitivity to default rate assumptions, one notch; sensitivity to recovery rates, one notch;
• Serie B: sensitivity to default rate assumptions, two notches; sensitivity to recovery rates, two notches.

About the transaction

IM Sabadell PYME 10, FT is a true-sale securitisation of EUR 1,272m (as of 31 May 2017) comprised of mortgage-secured loans (41.9%) and unsecured loans (58.1%) granted to Spanish SMEs to finance diverse business-related needs. The transaction closed on 3 August 2016. The assets were originated by Banco de Sabadell. The bank is an experienced originator with a business model that focuses on SME obligors. This model allows the bank to benefit from the Spanish economic recovery, which has been driven by the private sector.

Legal and regulatory disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr Stefan Bund.
The rating analysis has been prepared by Sebastian Dietzsch, Lead Analyst
Responsible for approving the rating: Karlo Fuchs, Committee Chair

Rating history
Instrument ISIN; Date; Rating action; Rating
ES0305154009; 03.08.2016; New; AA(SF)
ES0305154017; 03.08.2016; New; B(SF)
ES0305154009; 28.07.2016; Preliminary; (P) AA(SF)
ES0305154017; 28.07.2016; Preliminary;(P) B(SF)

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate from the issuer of the investment, represented by the management company. The issuer has participated in the rating process.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, hold any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources. Historical data used for this rating is limited. Monthly investor reports produced by InterMoney Titulización Sociedad Gestora de Fondos de Titulización S.A, covering the first nine months since the closing of the transaction up to the report dated May 2017; and proprietary information from Scope Ratings AG.
Scope Ratings considers the quality of the available information on the evaluated entity to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, use of confidential information, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodologies applicable for this rating are the ’SME ABS Rating Methodology’, June 2017, the ‘Methodology for Counterparty Risk in Structured Finance’, August 2016, and the‘General Structured Finance Rating Methodology’, August 2016. Files are available on www.scoperatings.com. Additionally, the new issue report IM Sabadell PYME 10, FT explains the framework and assumptions for the recovery analysis Scope has performed.
The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Conditions of use / exclusion of liability
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Scope Ratings AG, Lennéstrasse 5, 10785 Berlin.